Last Friday night, European regulators revealed plans to ban one of the most popular trading products that are available to the public.
The European Securities and Markets Authority (ESMA) wants to outlaw the sale of binary options to its retail clients.
The prohibition is a part of a bigger clampdown on the spread betting sector that would also observe contracts for differences leverage (CFD) limits, the amount of the risk/reward that a retail investor can expose themselves to, reduced dramatically.
A year ago, the Financial Conduct Authority (FCA), the City watchdog, stunned the spread betting sector by revealing its plans to protect retail investors. Some other European regulators followed suit, and during this summer, the matter was carried onto ESMA, so modification could be imposed across Europe.
ESMA said that it would conduct “a brief public consultation in January 2018” on the agency’s plans. Once in place, it would be the first time that the ESMA has used its so-called “intervention powers” in the financial markets.
The changes may arrive as a blow to some spread betting companies, which have reported bumper profits during this year. Others, of which the CMC Markets has been very vocal on various occasions, believe that the clampdown will help business by pushing rivals that focus on “lower-value” customers out of business.
The FCA plans last December did not cite binary options contracts since at the time, they were regulated not by the financial watchdog, but by the Gambling Commission, the gambling regulator of Britain.
At the time, the FCA wanted to decrease CFD leverage limits to up to 25:1 for new customers and 50:1 for those that are experienced.
However, last night, ESMA took a somewhat different approach, saying that CFD leverage limits should be capped at much lower – between 5:1 and 30:1 depending on the volatility of the asset that is invested in.
Similar to the proposals of the FCA, ESMA wants to limit trading incentives and bonus’, as well as the standardisation of risk warnings.